Exiting difficulties give illiquid Scandis limited appeal as a safe haven

WITH no end in sight for market volatility, options are dwindling for investors seeking safe haven currencies. Six weeks ago, the Swiss National Bank (SNB) made the bold move of putting a floor under the euro-Swiss franc exchange rate at SFr1.20. When it announced the move, the SNB said that it would protect the franc “with the utmost determination.”

So can safety be found in the Scandi currencies? As ratings agencies crash around the world sovereign debt markets, kicking down the door of every AAA government bond rating in sight, Norway and Sweden have held firm.

They have also ticked the right boxes when it comes to “monetary activism” – George Osborne’s new term of endearment for money printing and interest rate meddling. The Norge Bank has kept interest rates set for three meetings in a row. Looking at the price reaction to the SNB move on 8 September (see chart, below, left), you can see that as euro-Swissie jumped, Euro-Nokkie fell to around the kr7.500 level, as investors scrambled to find another haven currency matching the Swissie’s profile.

But despite the strong fundamentals, the Norwegian and Swedish currencies also show why investors are wary of slim, illiquid currencies. In the current volatile markets, entry into and exit from markets is paramount. Try offloading the Nokkie when the market turns sour and you’ll be stood with your palms out for a long time. Bad news if you want to fill in your stops. As Michael van Dulken, head of research at Accendo Markets points out, minors like the Nokkie and the Swedish krone are over the counter (OTC) and closed for the weekend, increasing the chance of being stopped out. “You could get gapped when Asia opens the trading week, if weekend news warrants everyone to try and pile out of their haven,” adds van Dulken.

Being out of the major league also presents a liquidity issue for something like a sterling-Nokkie pair. As a minor currency, the krone cannot be used as a base currency of a cross. So with sterling-Nokkie, you are actually looking at being long sterling-dollar and short dollar-Nokkie. In a volatile market you will have no problem on the cable side, but could come into difficulty buying out of the short dollar-Nokkie position.

Despite this, there is evidence that the Nokkie and the Swedish kroner can take a certain amount of capital inflows, but any real driving up of the currencies by investors seeking safety would likely activate the interventionist chip inside the brains of their respective authorities and trigger a central bank move. However, Stephen Gallo, head of market analysis for Schneider FX, suggests that the countries would shout before they shoot: “I would argue that Norges Bank and the Riksbank would warn speculators off long before any aggressive bidding happened, so that they would not end up like the Swiss, having to print money.”

The chart (below, right) of the current Norwegian sovereign curve, shows yields on various term debt instruments issued by the Norwegian government. “What is interesting is the sharp drop in yield up until about the 2-year sector, and the rise further out,” says Gallo. “The depressed yields at the shorter end of the curve are probably to one degree or another a result of safe haven flows into Norway.”

In short, while the Scandi currencies and other similarly thin and illiquid currencies offer some haven attraction, the potential for big market swings and the natural instinct for governments to meddle in currency policy should deter any major buying.